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Exam 12: Investments

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Question 71

Multiple Choice

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Sloan Company has owned a debt securities investment during 2018 that has increased in fair value. After all closing entries for 2018 are completed, the effect of the increase in fair value on total shareholders' equity would be:

A) Higher under the available-for-sale approach than under the trading-securities approach.
B) Lower under the available-for-sale approach than under the trading-securities approach.
C) The same amount under the available-for-sale and trading-securities approaches.
D) Not possible to identify whether the available-for-sale or trading-securities approaches yield higher shareholders' equity given this information.

E) A) and B)
F) A) and C)

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Question 72

Multiple Choice

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If the fair value of a trading security declines for a reason that is viewed as "other than temporary":

A) The investment is not written down to fair value.
B) The investment is written down to fair value, and an "impairment loss" is recognized in net income.
C) The investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.
D) The investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.

E) A) and B)
F) None of the above

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Question 73

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Both trading securities and securities available for sale are reported at their fair values.

Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2018. In December, Handy announced $200,000 net income for 2018 and declared and paid a cash dividend of $2 per share on all 200,000 shares of its outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2018 would be:

When an investor accounts for an investment in common stock at fair value through net income, cash dividends are classified by the investor as:

Trading securities, by definition, are properly classified in the balance sheet as:

Which of the following is not true about the fair value option?

Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

Assume that, on January 1, 2018, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at January 1, 2018. The following information pertains to Yankee during 2018: What amount would Matsui report in its year-end 2018 balance sheet for its investment in Yankee?

On January 1, 2018, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2018, was $80,000. During 2018, Short also paid cash dividends in the amount of $24,000. Required: Prepare the journal entries necessary to record the above information on American Corporation's books during 2018.

If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment:

On January 12th, 2018 Jefferson Corporation purchased bonds of Rose Corporation for $73 million and classified the securities as available-for-sale. On December 31st, 2018 these bonds were valued at $67 million. Eight months later, on October 3rd, 2019 Jefferson Corporation sold these bonds for $87 million. - As part of the multi-step approach to record 2019 transaction, Jefferson Corporation should finally take the third step of recording a sales transaction with a gain of:

A weakness of ________ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized holding gains or unrealized holding losses.

If Ziggy Company concluded that an investment originally classified as held to maturity would now more appropriately be classified as available for sale, Ziggy would:

Under IAS No. 39, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.

Fragrance International, a large perfume manufacturer, reported the following in its 2018 annual report to shareholders: ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income (loss) ("AOCI") included in the accompanying consolidated balance sheets consist of the following: -Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized holding gain or loss on available-for-sale securities at 7/1/2017?

Under IFRS No. 9, debt investments are classified as either "available for sale" or "fair value through profit and loss (FVPL)."

When the equity method of accounting for investments is used by the investor, the investment account is increased when:

On July 1, 2018, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2018, and paid $150,000 of dividends each quarter to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of:

According to GAAP, companies can elect the fair value option when accounting for many investments. Required: Describe how accounting for a held-to-maturity investment, an available-for-sale investment, and an equity-method investment is affected by a company electing the fair value option.